Policy interest rate being increased by 150 basis points to 4.00 per cent per annum, effective February 21

The Bank of Jamaica (BOJ) has decided to increase the policy interest by 150 basis points to 4.00 per cent per annum, effective February 21.

The BOJ’s policy rate is the rate offered to deposit-taking institutions on overnight placements with it. The hiked policy rate comes as the BOJ pursues stronger measures to contain Jamaican dollar liquidity expansion and to maintain stability in the foreign exchange market.

The BOJ’s decision to further reduce the level of monetary policy accommodation was made by a unanimous vote by its Monetary Policy Committee (MPC).

In general, monetary policy decisions taken by the BOJ are aimed at ensuring that the annual increase in the prices of consumer goods and services (i.e. inflation) remains within the Bank’s inflation target of 4.0 per cent to 6.0 per cent.

Reasons for hiking policy rate

The reasons cited for increasing the policy rates were as follows:

1. Inflation has accelerated and is significantly above target. Inflation at January 2022 of 9.7 per cent remained above the upper limit of the Bank’s target range and, without policy actions, this breach is projected to persist over the next 10 to 12 months.
2. While international commodity and shipping prices had declined in the early half of the December 2021 quarter, there have been some reversals and the impact of past increases has had a stronger than projected pass-through to local prices. The ongoing shock to international commodity prices has also contributed to a further rise in inflation expectations.
3. The prospects of earlier and stronger monetary tightening among Jamaica’s major trading partners may precipitate capital outflows and pressures on the exchange rate if domestic monetary policy is not appropriately aligned.
4. Underlying demand pressures may also begin to threaten the stability of the foreign exchange market and, with it, diminishing the prospects of inflation returning to the target range.
5. In the wake of past monetary policy adjustments, while interest rates in the money markets have increased at a faster pace than Bank of Jamaica’s policy rate, banks remained relatively liquid and, for the most part, have not passed on the policy rate increases to their customers who hold deposits with them. In this context, banks have also only marginally increased loan rates.

The BOJ explains that the MPC’s action was therefore necessary to limit the second-round effects of the commodity price shocks and to guide inflation back within the target range over the next two years. The date of the next policy decision announcement is March 29.  

Consistent with meeting its inflation target sustainably in the medium term, the MPC has agreed to consider maintaining or expanding its suite of policy measures at subsequent policy meetings. However, this position is subject to inflation, inflation expectations and other macroeconomic data evolving as projected.